Inequality, Consumer Credit and the Saving Puzzle

Inequality, Consumer Credit and the Saving Puzzle

New Directions in Modern Economics series

Christopher Brown

Providing much needed context for current events like the sub-prime mortgage crisis, this timely book presents a vision of an economy evolved to greater dependence on consumer credit and analyzes the trade-offs and risks associated with it. While synthesizing the Keynesian theory of consumption with the Institutional theory of habit selection (brought up to date with new knowledge from evolutionary biology and neuroscience), this book represents an in-depth treatment of the macroeconomic dimensions of consumer credit and implications of recent financial innovations from a non-traditional economic approach.

Chapter 3: A Brief History of Innovation in the Consumer Credit Industry

Christopher Brown

Subjects: economics and finance, institutional economics, post-keynesian economics


In Chapter 2, the decline of the personal saving rate was explained as the manifestation of an effort by a broad swath of households to maintain their relative consumption (or lifestyle) standards under pressure of sharply rising disparities of income and wealth. It was argued that an expansion of credit-financed expenditure can limit the degree to which ‘consumption inequality’ rises in the aftermath of an increase in income or wealth inequality, but this necessarily requires, ceteris paribus, a decrease in the average propensity to save among borrowing units. We now turn to the role of innovation in achieving a long-run relaxation of the household liquidity constraint. This chapter offers a description and appraisal of organizational, technical and financial innovations deemed important to the growth of the consumer credit industry beginning in the 1920s. These innovations are: the ‘captive’ finance company; lengthening loan maturities; credit scoring; and the securitization of consumer loan receivables. The chapter also contains a section that examines the growth of payday lending, assetbased lending, and other types of lending arrangements targeted to households with low incomes and/or poor credit histories. 3.1 THE CAPTIVE FINANCE COMPANY The forward integration into previously non-integrated activities such as wholesale and retail distribution was a defining feature of the post-bellum business revolution. Alfred Chandler (1988) explained the new pattern of downstream integration by the inadequacy of pre-existing systems of marketing and distribution to the requirements of modern mass production.1 The development of a wide-ranging dealer network was a...

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